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Employers with 100 or fewer employees who received at least $5,000 in compensation during the preceding year can adopt a relatively new type of simplified retirement plan, the Savings Incentive Match Plan for Employees (SIMPLE plan). If you want to establish a SIMPLE, it must be the only retirement plan you have — if you've already established another plan, you'd have to terminate it or convert it to a SIMPLE.
The plan allows employees to make elective contributions of up to $10,500 per year in 2007 and 2008 and requires employers to make matching contributions on a dollar-for-dollar basis, up to 3 percent of each employee's pay. Participants in a SIMPLE plan who are age 50 and older in 2007 can save an extra $2,500. Alternately, you can decide to make a "nonelective" contribution of 2 percent of each participating employee's pay regardless of whether they make any elective contributions. In figuring matching contributions, no more than $225,000 of the employee's 2007 compensation can be taken into account ($230,000 in 2008).
Assets in the account are not taxed until they are distributed to an employee, and employers may generally deduct contributions to employees' accounts. In addition, the SIMPLE plan is not subject to the nondiscrimination rules or other complex requirements applicable to qualified plans, mainly because the contributions to each employee's account must follow exactly the same formula.
SIMPLE plans may be structured as an IRA or as a 401(k) plan. All contributions to an employee's SIMPLE account must be nonforfeitable. If a SIMPLE plan is adopted, it must be open to every employee who is reasonably expected to receive at least $5,000 in compensation during the current year and received at least $5,000 in compensation from the employer during any two preceding years. Self-employed individuals are also eligible to establish a SIMPLE plan.
Distributions from a SIMPLE account are generally taxed like distributions from an IRA. Participants may roll over distributions from one SIMPLE account to another free of tax. In addition, a participant may roll over a distribution from a SIMPLE account to an IRA without penalty if the individual has participated in the SIMPLE plan for at least two years.
Participants who take early withdrawals from a SIMPLE account before age 59-1/2 are generally subject to the 10 percent early withdrawal penalty. However, employees who withdraw contributions during the two-year period beginning on the date that they first began participating in the SIMPLE plan will be assessed a 25 percent penalty tax.
Deducting SIMPLE contributions. Contributions for employees to a SIMPLE plan would be reported on Line 19 of your Schedule C, as a "pension and profit sharing plan." Contributions for yourself are reported on Line 28 of your Form 1040. There are also reporting requirements associated with setting up and maintaining the plan itself; see IRS Publication 560, Retirement Plans for Small Business, for more details.
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